Tuesday, July 12, 2016

The Importance of Setting & Tracking Dividend Goals

This is a guest
contribution from Ben Reynolds at Sure Dividend. Sure Dividend uses The 8 Rules of Dividend Investing to systematically identify high quality
dividend growth stocks.

The end goal of dividend investing is financial
freedom. It is the point at which your
passive dividend income (after taxes) can pay for all your expenses.

When you hit that point, you are truly financially free.
Don’t want to work the 9 to 5 job (which is probably more like the 8 to
6)? You don’t have to. It doesn’t mean you have to retire, it just means that you are free to live your life
on your terms without worrying about where the next paycheck will come from.

Unfortunately, reaching financial freedom is not something
that happens quickly or easily. It takes
time, patience, dedication, and planning.

Based on what you read online analyzing hundreds or
thousands of dividend stocks is what it takes to reach financial independence.

It’s true that you need to invest in dividend stocks
wisely. I’m not saying to randomly
select stocks to invest in. What
businesses you invest in matters.

But what I think is even
more important is to be able to set goals and track your progress towards

reaching those goals.

As an example, if you find the ‘perfect’ dividend stock,
hold for 2 years, sell, and then switch to momentum investing you are never
going to have your passive dividend income exceed your expenses.

It’s not about finding short term gains, it’s about being
able to make a plan and stick with it for the long-run.

And that’s what JC does so well at Passive Income
Pursuit. If you haven’t seen them yet,
take a look at JC’s Goals page and
his Progress page.

Setting Goals

One of my favorite goal setting methods to follow is the SMART method. Following this method, goals should be:

Specific

Measurable

Attainable

Relevant

Time-Bound

When you are setting your goal, you should make it
specific. As an example: “My goal is to have my after-tax dividend
income exceed my monthly expenses.”

The goal should be measurable. Obviously, annual dividend income is very measurable, so no problems there.

The goal should also be attainable. For example, my goal shouldn’t be to become
the world’s first trillionaire. It isn’t
going to happen. Financial freedom may
take a long time, but it is attainable
(with a plan).

Becoming financially free is certainly a relevant goal. Relevancy is determined by your specific
life. It’s important to ask if achieving
the goal is something that will improve your life, others’ lives, or make you
happier. Some goals are worth
completing, others aren’t. I strongly
believe financial freedom is an excellent goal to strive for.

The final aspect of the SMART method is to make your goal time bound. For example:
“My goal is to have my after-tax dividend income exceed my monthly
expenses by 2028”.

Time bound goals force you to think about how you bring your
goal to reality. Financial freedom someday isn’t really concrete – after
all, reaching financial freedom when you turn 98 might be nice, but it probably
isn’t most people’s ideal scenario.
Financial freedom by 2028 (or any other year in the future) is concrete
and actionable.

Tracking Progress

It’s not enough to just set your goal. Goals are not a ‘set and forget’ thing
(unlike high quality dividend growth stocks).

You have to track your goals to make sure you are on
schedule. If you are on schedule or
ahead of schedule, congratulations! Keep
doing what is working.

If you are behind schedule, you should look at why.

Was your goal to ambitious?
Does it need to be revised? Did a
one-event derail you that won’t happen again?
Are there toxic elements in your life preventing you from
progressing? What can you do to get back
on track?

You won’t know if what you planned is coming to fruition or
not unless you check the progress of your goals.

How often you check your goals depends on the goal. If your goal is to break a habit (like
smoking or nail biting), daily progress is likely appropriate. For dividend growth investing, either monthly
or quarterly is a good time frame. You
can see that JC updates monthly.

Final Thoughts –
Realistic Dividend Goals

There are only 2 factors in reaching true financial
independence (when passive income exceeds expenses):

Passive Income

Expense

You have immediate
control of #2 (to some degree – unexpected things happen in the real
world). You have eventual control over #1 (also, to some degree).

Your dividend growth investments will compound over time. The
exact compounding ratio will likely be somewhere between 6% and 12%, depending
on what the market does and the success of the businesses in which you invest
(assuming dividend are reinvested).

The amount you save each month is a very large factor in how
quickly you will reach financial independence.
The amount you save is entirely determined by your income and your
expenses.

Finding ways to boost your income and reduce your expenses
helps to increase your savings rate which will reduce the time required to
reach a certain level of passive income.

4 comments:

Thanks for the article. The SMART method is a well known and well proven method for keeping yourself on track. I've read numerous self help books that use that as their primary guideline for keeping people motivated. It's no surprise that it would also be useful for investing and keeping your portfolio on track and benchmarked. I hope this inspires those that aren't already keeping track to start. Thanks again for the read.

Of course the best results would be attained by having a total return approach in the accumulation stage - more money equals more income. More money buys more income. One would then slide to a retirement funding approach. That's easy for a reasonably knowledgeable self directed investor. Dale

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